Inflation Sure To Dominate In Questioning Fed Nominee

By EDMUND L. ANDREWS

Published: November 15, 2005

Ben S. Bernanke, President Bush's nominee to lead the Federal Reserve, will have to fend off two contradictory perceptions at his Senate confirmation hearing on Tuesday.

Some Democratic lawmakers worry that Mr. Bernanke, who has contended for years that the Fed should set policy according to an explicit inflation target, will be too focused on price stability and not attentive to employment.

Some bond investors, by contrast, fret that Mr. Bernanke will be soft on inflation. As a Fed governor in 2003, he raised alarms about the ''jobless recovery'' and the dangers of deflation. As a top adviser to Mr. Bush since June, he has been more confident than many Fed officials that inflation would remain low.

Both images are likely to prove simplistic, but the way Mr. Bernanke deals with them could provide important clues to his long-term vision for the Fed and his efforts to establish credibility.

Mr. Bernanke, a former professor at Princeton University and a Fed governor from 2002 until earlier this year, is likely to win Senate confirmation without a major fight.

''It's noncontroversial,'' said Senator Jack Reed, Democrat of Rhode Island and a member of the Senate Banking Committee. ''It's hard to argue about his qualifications.''

But Mr. Bernanke will nonetheless face questioning on three basic questions:

How would inflation-targeting work, and would it be more rigid and formulaic than policy making under Alan Greenspan? Based on his writings and his signals to lawmakers in recent days, Mr. Bernanke is likely to emphasize the need for flexibility and ''constrained discretion.''

Is Mr. Bernanke a hawk or a dove on fighting inflation? His writings and his record at the Fed suggest he will be in line with the Fed consensus: the top priority will be to maintain price stability, even if it hurts.

Would Mr. Bernanke lend his authority to Mr. Bush's goal of making his tax cuts permanent, even if that increases the federal budget deficit? Here, Mr. Bernanke may end up providing even more support to Mr. Bush than Mr. Greenspan has.

As a White House adviser, Mr. Bernanke has already joined the call to make the tax cuts permanent. And unlike Mr. Greenspan, Mr. Bernanke has not argued that Congress should be required to offset the cost of tax cuts with savings in other areas.

''Low marginal tax rates are supportive of economic growth,'' Mr. Bernanke told the Joint Economic Committee earlier this year. ''I would submit that we would want to look very hard at government spending -- make sure it's controlled -- before we raise taxes, which, in turn, would have negative impacts on the economy.''

By almost all accounts, Mr. Bernanke would continue the Federal Reserve's political independence on monetary policy.

Mr. Bernanke, though a Republican, spent most of his career as a politically nonpartisan academic economist. His pursuit of inflation targets and other predictable rules for policy making would, if anything, make the Fed less amenable to political influence.

Mr. Bernanke has argued that the Fed policy would be less personalized, more open and more predictable if it were based on an explicit and public inflation target.

Mr. Bernanke has gone so far as to suggest that inflation should be held to 1 to 2 percent a year, excluding the fluctuations of energy and food.

Critics of inflation-targeting fall into two broad groups. Some, like Mr. Greenspan, contend that the practice would be too rigid and formulaic and would make it harder to deal with unexpected shocks.

Other critics, including some Democrats, worry that inflation-targeting would conflict with the Fed's dual mandate of pursuing both price stability and full employment.

In practice, Fed policy under Mr. Bernanke might not be all that different. Many analysts contend that the Fed already has an unstated inflation target, about 2 percent a year, and a preferred method of calculating inflation.

Mr. Bernanke, for his part, has written that the Fed can deviate from its inflation target -- perhaps for several years, if necessary -- to cope with an unexpected shock to the economy.

On inflation, many analysts predict that Mr. Bernanke would, at least at the beginning, err on the side of toughness and higher interest rates to establish his credibility with financial markets.

But Mr. Bernanke was among the more dovish members of the Federal Open Market Committee, which sets interest rates, when policy makers were worried the United States might be headed toward a downward spiral in consumer prices.

In August, as chairman of the Council of Economic Advisers, Mr. Bernanke sounded more confident than Fed policy makers about inflation.

Fed officials had begun to fret that rising energy prices and other pressures might start to push up inflationary expectations. Partly as a result, Fed officials rebuffed speculation that they might pause in their gradual raising of interest rates.

Mr. Bernanke, by contrast, told reporters at Mr. Bush's ranch in Texas that he saw no signs of a problem. ''I see inflation as remaining well contained going forward,'' he said.

Investors are now betting that the Fed will raise the overnight Federal funds rate two more times before Mr. Greenspan steps down on Jan. 31, and that Mr. Bernanke will raise them at least one more time in his first two meetings as Fed chairman next year.

But bond investors have been more jittery about the long term. Interest rates on 10-year Treasury bonds have edged up significantly over the last several months, to almost 4.6 percent from about 4 percent, on expectations that inflation is picking up.

As an academic economist and as a Fed governor, Mr. Bernanke prided himself on speaking clearly and sometimes even bluntly. But on Tuesday, Mr. Bernanke will face lawmakers who want ''flexibility'' and bond markets that want inflation-fighting credibility.

To satisfy both constituencies, he may have to sacrifice on his plain-speaking.

Photo: Ben Bernanke will probably also be asked about the effects of making the Bush tax cuts permanent. (Photo by Larry Downing/Reuters)(pg. C4)